Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that International CSRC Investment Holdings Co., Ltd. (TPE:2104) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does International CSRC Investment Holdings Carry?
As you can see below, International CSRC Investment Holdings had NT$9.74b of debt at December 2020, down from NT$11.2b a year prior. But it also has NT$17.7b in cash to offset that, meaning it has NT$7.92b net cash.
A Look At International CSRC Investment Holdings' Liabilities
According to the last reported balance sheet, International CSRC Investment Holdings had liabilities of NT$13.2b due within 12 months, and liabilities of NT$3.12b due beyond 12 months. Offsetting this, it had NT$17.7b in cash and NT$3.93b in receivables that were due within 12 months. So it can boast NT$5.23b more liquid assets than total liabilities.
This excess liquidity suggests that International CSRC Investment Holdings is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, International CSRC Investment Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact International CSRC Investment Holdings's saving grace is its low debt levels, because its EBIT has tanked 32% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine International CSRC Investment Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. International CSRC Investment Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, International CSRC Investment Holdings saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While it is always sensible to investigate a company's debt, in this case International CSRC Investment Holdings has NT$7.92b in net cash and a decent-looking balance sheet. So we are not troubled with International CSRC Investment Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for International CSRC Investment Holdings that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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